Working Capital Management: Large Enough to Get Dr. Evil Excited

Procurement Leaders recently posted a story summarizing some of the findings from a recent E&Y study on working capital management effectiveness, suggesting that "many companies are simply not managing their working capital particularly well -- despite a renewed focus on days payables and inventory management, forced by the current economic climate". According to the report, there's roughly a $1 trillion opportunity in focusing on working capital through better management of both the accounts receivable and payable processes -- not to mention reducing inventory and WIP. The Financial Times also covered the study, noting that "Ernst & Young estimates that companies that take a structured approach to improving working capital can improve their liquidity by 5 per cent of their annual sales. It recommends companies change their bonus schemes to reward improvements in cash performance and to modify payment terms for customers and suppliers where necessary."

Clearly, the opportunity for reducing working capital management requirements through extending payment terms with suppliers is significant. After all, any career consultant in the space will attest to the fact that standardizing -- read: extending -- payment terms is one of the best ways of saving a cost reduction project that's gone South in other areas. But for those of us who come from the supplier management trenches, we know that such behavior can severely damage supplier relationships and increase supply risk (not to mention performance related issues). Fortunately, however, bank and other third-party financing options such as the Receivables Exchange can provide liquidity for early payables discounting programs that give suppliers an option to receive payment early without impacting the working capital of the buying organization. Such programs allow procurement and finance groups to share in the spoils without any risk (at what often amounts to 20%+ or greater APR according to some of my sources).